Energy Fraud

The U.S. Department of Energy (DOE) is the largest federal civilian contracting agency. Each year, the DOE, along with state governments, spends billions of dollars in the form of research grants and other contracts with private companies to develop alternative and renewable energy sources including wind, solar, biofuel, ethanol, and clean coal. In addition, the DOE spends approximately $20 billion per year on contracts with private companies that manage energy resources, including the highly lucrative management of nuclear waste sites. Since the 1990s, the DOE has identified nuclear waste contracts as high risk for fraud. Fraud can include any false statement regarding the costs of managing energy; and companies doing so can establish liability under the FCA. The most common types of energy fraud include:

• Overbilling for contractual services associated with purchasing, developing, managing, or transporting energy resources
• Research grant fraud – falsifying a grant application to secure an energy research grant
• Underpaying royalties – manipulating the amount of royalties owed to the federal government from valuable natural resources discovered on federally owned land

In addition to energy fraud involving the development or management of energy resources, the underpayment of royalties to the government for energy resources discovered on its land represents a large number of energy fraud cases. The Government Accountability Office (“GAO”) has recently reported that the government is losing billions of dollars in royalties to which it is entitled under oil and gas leases.

Companies that develop and produce oil and gas resources on federally owned lands and waters operate under leases obtained from and administered by the Bureau of Land Management (“BLM”) under the Department of the Interior (“DOI”) for onshore leases and the Offshore Energy and Minerals Management (“OEMM”) under the Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEMRE”) for offshore leases. These two agencies are charged with overseeing oil and gas operations on more than 28,000 producing leases which requires oil and gas companies to comply with applicable laws, regulations, and agency policies. Companies who operate on federally owned lands and waters under this lease agreements are contractually obligated to compensate the government for producing oil and gas resources either “in value” (royalty payments made in cash) or “in kind” (royalty payments made in oil or gas). In 2006, roughly fifty eight percent of the $9.74 billion in oil and gas royalty payments were made in value or in cash while about forty two percent were made in kind.

The GAO report criticized government agencies for failing to conduct sufficient inspections to ensure that oil companies that drill on federally owned land under federal leases accurately report production volumes on which royalties should be paid. As a result of this lax oversight, the government has potentially lost “billions of dollars in forgone revenue” since royalty rates were established at a time when oil industry profits were less exorbitant. Whistleblowers with knowledge of these underpayments can help the government by using the False Claims Act to recover damages for the government and share in any potential recovery.

Example

Vortec Corporation contracted with the DOE and agreed to furnish all personnel, equipment, and supplies for building a research facility concentrated on developing recycling technology. The contract permitted Vortec to bill the DOE for related costs incurred during the project. However, Vortec allegedly submitted reimbursement claims for equipment that was never actually purchased, and also for personal expenses including jewelry, hotel rooms while on vacation, and car maintenance. Vortec settled an FCA case with the government for $4.5 million. The whistleblower, a former accounting manager, received a $1.08 million reward.